Wednesday, November 8, 2017

The
middle class has been stuck in a rut – psychologically if not economically –
for years, and they’re not afraid to admit it.
Last year’s upset victory for Donald Trump in the U.S. presidential race
was a manifest token of middle class angst.
Opinion polls have shown that many of the anxieties expressed by the
middle class last year are still a concern for them this year. In other words, not much has changed since a
year ago. There are some strong
indications that the middle class outlook will change for the better in the
coming months, however, as we’ll discuss in this commentary.

Ask
the typical middle class wage earner if they think they’re economic prospects
will improve in the year ahead, however, and you’ll likely receive a cynical
response. If there was any doubt that
Middle America’s economic prospects haven’t improved much since last year, the
following graph will lay them to rest.
Shown here is the Middle Class Index (M.C.I.), a share price composite of
several leading companies that cater to a largely middle class customer
base. The components of this index
include JC Penny (JCP), Ford (F), Dollar General (DG), Wendy’s (WEN), Wal-Mart
(WMT), and Kroger (KR).

If
the above graph is any indication of middle class consumption patterns, then
middle income Americans haven’t exactly set the world on fire with their
spending. The implication of the M.C.I.
is that while middle class spending has certainly increased over the last several
years, it has essentially flat-lined on a 3-year basis. While there is admittedly a danger in reading
too much into such a simplified overview of middle class spending, it’s likely
not far from the truth to assume that middle class Americans aren’t making much
progress. At least, that’s how they feel
based on the trend of the Middle Class Index.

So
the question is, “Will the economic prospects ever improve for the middle
class?” While many would respond with a
bleak “Never!” there is actually a good indication that the year ahead will witness
some solid improvement. Consider the
next chart exhibit, which highlights the prospects for the upper middle class
(i.e. individuals who earn in excess of $75K/year). The Upper Middle Class Index shown here is a
stock price average of several companies which cater mainly to the upper
middle, including Target (TGT), Starbucks (SBUX), BMW (BMWYY), Apple (AAPL),
and Ruth’s Chris (RUTH).

What
this graph suggests is that, in contrast to the middle class, upper middle
class consumers have increased their spending over the last year. In just the last few months alone the Upper
Middle Class Index has trended decisively higher as luxury spending among upper
middle and upper income consumers has been buoyant. The message of this indicator is that the
upper middle class is in much better shape than the middle class.

There
is another takeaway from our discussion of the Upper Middle Class Index,
however. Historically, economic
improvement following a major downturn like the last recession proceeds from
the highest economic classes to the lowest.
It’s much like a freight train when it starts rolling from a standstill;
the engine moves first, then the cars closest to the engines, and so on until
at last the final cars begin moving forward.
The upper class is always the first to benefit from an increase in
credit and money supply, then the upper middle, then the middle, and finally
the lower class. Like a train, economic
momentum takes time to build up but when it finally becomes established it
tends to be self-sustaining.

The
fact that the Upper Middle Class Index is increasing is a positive indication
for the middle class, for it suggests that the increased spending patterns of
the upper class of recent years have finally spilled over into the upper middle
class. Eventually the middle class will
eventually follow the lead of the upper middle, as is always the case.

One
sign that the U.S. economy may be on the cusp of truly breaking out is found in
the graph illustrating the rate of change in M2 money velocity. This is one way of measuring the demand for
money. Money demand, as measured by the
ratio of M2 money stock to nominal GDP, has been extremely high by historical
standards for the last several years. In
fact, the demand for cash has been extraordinary since the 2008 crash, as
investors have feared a recurrence of the crisis years. The inverse of this measure is the velocity
of M2 money (nominal GDP divided by M2).
Velocity remains near multi-decade lows in reflection of the public’s
massive demand for cash; however, it shows signs that it may be reversing.

The
following graph, courtesy of the St. Loius Fed (https://fred.stlouisfed.org),
shows the year-over-year change in M2 money stock. As you can see, it’s trending gradually
higher and is close to entering positive territory for the first time since Q1
2010, when the combined impact of Federal Reserve and U.S. government stimulus
was at its highest following the Great Recession. This is also a sign that the perennial problem
of low inflation is gradually reversing as inflation slowly, almost
imperceptibly, makes its return.

Another
indication that things are about to improve for the middle class is, perhaps
surprisingly, the price of gold. Gold
serves two primary functions in today’s economy. The first is as a reflection of how much fear
exists among investors as it pertains to the future outlook. The gold price is basically one way of
gauging how much confidence stakeholders (producers, consumers, and investors)
have in the future prospects for business.

More
than this, gold is also a measure of future inflation expectations. When the economy was still quite fragile
between the years 2009 and 2011, investors placed a high premium on gold
ownership as reflected in runaway gold prices.
When it became clear in late 2011, however, that the U.S. recovery was
gaining traction, gold lost much of its luster as a safe haven and it became
less desirable for investors to commit the bulk of their investment capital to
it. Risk assets instead became more
attractive, undermining the demand for gold.

Since
last year, however, gold has embarked on a “silent comeback,” effectively
ending a four-year bear market. (See the
SPDR Gold Shares ETF chart below for illustration.) It has been consolidating its gains in recent
months as it prepares to continue its long-term rebound. The going has been slow for the most part,
mainly because inflation has been slow to return and equities continue to steal
some of the yellow metal’s thunder. If
the M2 velocity chart shown above is any indication, however, then inflation
should slowly increase in the coming years.
This would certainly brighten gold’s longer-term prospects and make gold
ownership more attractive to the average investor once again. A moderate amount of inflation, besides
boosting gold’s lure, would also help the middle class to recover even more.

In
the final analysis, a full-fledged middle class economic revival has been
talked about and anticipated for years, and its failure to arrive has been
frustrating. Its manifestation is long
overdue, however, and while it has been slow in coming the indicators discussed
here bode well for the middle class in the months ahead. History shows that sustained improvement in
the upper middle class always eventually spills over to the next level down,
which is good news for Middle America in 2018.

Sunday, August 13, 2017

Following
is the 2014-2017 weekly performance of the MSR total stock/ETF portfolio based
on all buy/sell trading recommendations in the Momentum
Strategies Report. The performance graph pictured here was updated as of Aug. 7,
2017.

Recommendations
made in the Momentum Strategies Report are
based on a combination of technical analysis, fundamental analysis, relative
strength analysis and investor sentiment analysis. Recommendations are only made in what are
deemed to be high-probability, low-risk, low-volatility trading
opportunities.

All
trades are initiated once a “buy” signal is confirmed by the price line of the
stock or ETF in relation to its 15-day moving average, along with other
pertinent technical confirmation (e.g. relative strength, internal momentum,
etc.). Conservative stop-loss
recommendations are given and continually updated with each trading
position. The average length of the trades
made in MSR is approximately two months, but can sometimes be longer.

MSR
rarely recommends short selling (only in confirmed bear markets) and prefers a
100% cash position whenever faced with a dearth of potential high-probability
buy candidates.

In the
vast majority of cases, there are only 1-2 stocks/ETFs in the model portfolio
at any given time.Rarely are more than three
positions recommended at one time.This
allows us to concentrate all our attention on a few positions without being
distracted by having to worry about multiple positions.This also limits draw downs.Most recommended positions involve
low-volatility, actively traded NYSE stocks and ETFs.

The preceding
graphs reflect only entry and exit signals, not profit-taking advice.

[Note: Performance graph is updated each Friday based on change in
portfolio value from previous Friday.]

Friday, July 21, 2017

Heading
into 2017, Wall Street was excited by the prospect of a U.S. president who
sympathized completely with business.His
promised tax and healthcare reforms were widely cheered by investors in the
wake of his election.Yet the Congress
has so far failed to deliver on those promises and investors are no longer
giving the Trump administration a free pass based on the assumption that tax
breaks are on the way.

This
loss of enthusiasm is reflected in the long periods of dullness the market has
experienced since March. While the bull
market leg which began with the November election remains intact, the market
has proceeded in a halting fashion and has gradually lost some of its erstwhile
momentum. The following graph illustrates
this principle.

Along
these lines, a number of Wall Street economists have expressed the belief that
if Trump’s promised reforms fail to materialize, the stock market’s current
valuation precludes a continuation of the bull market. There are a number of reasons why this
statement is likely false, however, not the least of which is that the market
doesn’t need a political excuse to rally.
Indeed, if that were the case then China’s equity market, in view of the
country’s Communist government, would forever be stuck in neutral. The pace of innovation and productivity in
countries with a market-driven economy is consistently high enough to always
provide some justification for higher valuations and stock prices, regardless
of the political climate.

Writing
nearly 200 years ago, Alexis de Tocqueville observed that in America no matter
how much the tax burden increased, American ingenuity and resourcefulness
always found a way to counteract its malignant effect. He stated:

“It
is certain that despotism ruins individuals by preventing them from producing
wealth, much more than by depriving them of the wealth they have produced; it
dries up the source of riches, whilst it usually respects acquired property. Freedom, on the contrary, engenders far more
benefits than it destroys; and the nations which are favored by free
institutions invariably find that their resources increase even more rapidly
than their taxes.” [Democracy in America]

Tocqueville
understood that America is unique among the nations in that its people and
commercial spirit are strong enough to countervail even the most strenuous
attempts by politicians at slowing commercial progress. This principle is as true today as it was
then, perhaps even more so.

While
many analysts are concerned by currently high market valuation indicators, the
reality is that valuations can climb considerably higher before the market is
in imminent danger of a bear market. The
S&P 500 P/E ratio may be high at 26.13 by historical standards, it’s still
a ways from those high levels in the late 1990’s/early 2000’s which preceded
the death of the powerful ‘90’s bull market.
Moreover, price/earnings alone isn’t a reliable measure of how
undervalued or overvalued a market is.
One must also take into account the investor sentiment backdrop, levels
of participation among retail investors, and other technical and monetary
policy factors when forming a final determination as to whether or not the
market is truly “overvalued.”

To
illustrate how important it is to consider investor sentiment along with
valuation, I reprint here the words of William Jiler, who wrote investment
books in the 1960s. Using International
Business Machines (IBM) as an example, he wrote:

“How
could [an investor] anticipate that IBM would sell as low as 12 times its
annual profit in the late Nineteen Forties and at 60 times earnings in the late
Fifties? Obviously, ‘investor
confidence’ went up sharply in the Fifties.
And obviously, the psychology of the market – that is, the sum of the
attitudes of all potential buyers and sellers – is a crucial factor for
determining prices.” [How Charts Can Help You in the Stock Market]

The
main consideration for stocks going forward is the level of participation among
individual investors. With investor
sentiment still neutral and few small investors actively trading, the bull
market still has plenty of room to run.
The informed investors who are keeping the bull market alive need
someone to sell to when it finally comes time for them to unload their
holdings. That someone is the uninformed
public which by and large has been afraid of owning stocks since the 2008
credit crash. Until they rediscover the
“joys of investing” the 8-year-old bull market will continue to age, all the
while maintaining its vigor.

History
teaches that following a major financial crisis, a bull market lasting from
around 20 to 30 years normally follows.
Such was the case following the Great Crash and Depression of the 1930s,
the economic and political turmoil of the early 1970s, and in other eras in
U.S. market history. The last crisis in
2008-09 witnessed the birth of a new secular bull market which is already eight
years old. A generation is around 20-30
years, which partly explains why bull market typically last so long until the
next great crash; it takes that long for the generation that experienced the
last crisis to be replaced by an entirely new one which doesn’t remember
it. It’s only when the new generation
has come of age that the mistakes which led to the previous crisis are repeated
and the cycle begins anew.

Given
that the current generation is still, nearly 10 years later, still averse to
stocks to a large extent, the secular bull market has probably another 10-20
years to run before encountering the problems which always prove fatal to
it. I’m referring of course to the
dangers of over-participation and excess enthusiasm. Those dangers are nowhere in sight
today. We can therefore assume that the
long-term bull market still has many more years to run before eventually
reaching its terminus.

Friday, July 14, 2017

“The tape tells all” is a Wall Street bromide we’re all
familiar with.It neatly summarizes the
belief that the major averages discount everything pertaining to the business
outlook.It’s also a basic tenet of Dow
Theory.

Writing
a century ago, Richard Wyckoff was one of the very first market pundits to put
this belief in writing. “The tape tells
the news minutes, hours and days before the news tickers or newspapers and
before it can become current gossip,” he wrote.
“Everything from a foreign war to the passing of a dividend; from a
Supreme Court decision to the ravages of the boll-weevil is reflected primarily
upon the tape.”

This sentiment was also eloquently summarized by author
Robert Rhea over 80 years ago. Writing
in his classic book, The Dow Theory,
Rhea observed:

“The fluctuations of the daily closing prices of the
Dow-Jones rail and industrial averages afford a composite index of all the
hopes, disappointments, and knowledge of everyone who knows anything of financial
matters, and for that reason the effects of coming events (excluding acts of
God) are always properly anticipated in their movement. The averages quickly appraise such calamities
as fire and earthquakes.”

The
late Joe Granville took this a step further by suggesting that the stock market
represents the sum total of a nation’s intelligence across many different
fields. He maintained that the market
knows virtually everything worth knowing about the short-to-intermediate-term
outlook.

Writing
in September 2004, just after a devastating series of Florida hurricanes,
Granville observed: “When the stock market turns down it is warning of trouble
ahead. It doesn’t matter what the
trouble turns out to be…For a look at the future it was only necessary to follow
the market instead of hurricane reports.”
In view of the vulnerable state of the market prior to the major
hurricanes of 2005 and 2012 (Katrina and Sand), perhaps Granville was on to
something.

Not
all investors believe that Mr. Market reflects the sum of all wisdom as it
pertains to the future outlook, however.
Proponents of Random Walk Theory in particular dismiss this notion with
scorn. But are they right to reject this
proposition?

Experience
has shown that Granville’s proposition is essentially correct, if overly
simplistic. To assume that the market
always declines at the first scent of trouble would be the height of
folly. The collective wisdom of informed
investors does tend to trace out its foresight in the charts, but it isn’t
always blatantly obvious at first and sometimes is evident only in
retrospect. The market action of the
year 2007 is instructive. Consider that
beginning in February that year the market commenced a series of volatility
plunges as insiders first began to manifest their advance knowledge of the
coming credit storm.

In
between, and immediately after, the market plunges in February and August ’07,
however, the S&P made new highs.
This was either a consequence of the recoil rallies going too far, or
was the result of manipulation to disguise insider selling. The lesson here is that while Mr. Market will
usually provide advance warning signals for trouble on the horizon you must
often pay close attention to discern those signals, for it isn’t always
obvious.

If
the tape does indeed tell all, what is it telling us now? The major indices and the NYSE breadth
indicators have been in good shape for most of the year. By the same token, cumulative trading volume
has been subdued because of diminished participation among individual traders
as passive ETF investing has gained popularity.
The major averages have been buoyant, but not lively, in recent
months. This has been reflected in the
economic news for most of the year, and there have been no crisis events to
speak of. The market, in short, has been
dull and listless in reflection of the lack of bad news news. You could even say that the market has
predicted the lethargic U.S. political/economic scene of recent months by its
own lack of excitement.

If
the tape indeed tells all (and I believe it does), then it’s telling us that
there are currently no major worries among informed investors and insiders
about anything that might torpedo the U.S. ship of state and disturb the
country’s equanimity. Developments of
this magnitude take time to develop and the traces of these dangers always
eventually manifest in the stock market long before making an announcement
anywhere else.

This
is not to say that the market will necessarily continue to experience smooth
sailing for the balance of the year, as short-term volatility tends to be
erratic and isn’t always predictable.
But the tape doesn’t suggest anything calamitous on the horizon,
contrary to the warnings of the perpetual alarmists. The secular bull market which began in 2009
is still very much intact with lots of room to run before entering those
tumultuous shoals which always mark the end of the line. By the time that point has arrived, however,
the tape will have long since whispered the danger to those who bother to
listen.

Though
many Americans aren’t feeling it, the economy is quietly gathering forward
momentum. With consumers gaining in confidence and real estate heating up
on both the commercial and residential levels, the U.S. economy is much
stronger than it may seem at first glance.

One reflection of the strengthening economy is the equity market, which is in
the eighth year of a bull market since the bottom of the credit crash. The
bromide, “As goes the stock market, so goes the economy,” is something that
hardly needs explaining, yet so many investors lose sight of this cogent fact
that it bears repeating. Rising corporate profits and efficiencies in
recent years have contributed in large part to the economic improvement.

Another reflection of the recovery can be seen in our in-house New Economy Index
(NEI), which combines the stock prices of the leading U.S. retail and business
service stocks. The graph below shows that NEI continues to hit all-time highs
on almost a weekly basis and as such is reflecting a strong consumer retail economy.

With so many indicators pointing to a strong economy, why then are so many
Americans acting as if recession is imminent? That’s the question we’ll
address here.

Ed Hyman is one of the most respected, and accurate, economists. As
Barron’s recent observed, he has been voted Wall Street’s top economist for 36
of the past 41 years in Institutional Investor’s annual poll.

In an interview conducted by Barron’s editor Randall Forsyth, Hyman said he
sees cities around the U.S. “booming,” including smaller ones away from the
megalopolises on the coasts. His conclusion is that this will benefit Main
Street more than Wall Street.

Hyman has a rather old-fashioned, yet highly effective, method of gathering
data from which to make his forecasts. His team of researchers simply
contact companies such as employment agencies, truckers, car dealerships and
home builders and ask, “How’s business?” A rating scale of zero to 100 is
used by respondents to describe business conditions and from this tally Mr.
Hyman is able to get a good read on what’s happening in the economy.

According to Barron’s, Hyman’s surveys were trending higher well ahead of last
year’s election. “At that time,” quoting the Barron’s article, “his
model was forecasting real growth in gross domestic product of about 1.5%,
although not as ‘uplifting’ as the recent ‘soft data,’ such as confidence
surveys, indicate. Now, the model points to 3% growth, bolstered by
indicators such as tight credit spreads and high consumer net worth, which accords
with what he calls a ‘scientific method.’”

Ad Ed travels around the country, he’s finding that “every place is booming,”
he told Barron’s. “Every major city, Chicago, Minneapolis, Kansas City,
they’re doing great.” Smaller cities are also outperforming, he says.

Hyman also reports that “millennials are coming on like locusts,” as they
emerge from years of living in their parents’ basements. “They’re getting
jobs and apartments,” he told Barron’s. “Millennials’ employment is
growing at 3% while everything else is growing 1%.”

Hyman also pointed out that many observers have undervaued the extent to which
central banks around the globe “are still flooding the system every week” with
liquidity, with the Bank of England and the ECB having purchased more than two
trillion euros’ ($2.14 trillion) worth of bonds in less than three years.
Meanwhile the BOJ and the Federal Reserve, along with the ECB, hold $13
trillion in assets, which has lowered interest rates around the globe.
This, he says, explains how the Fed funds rate at just 0.80% while U.S.
companies are doing so well.

If Hyman’s macro optimism is to be believed – and our indicators strongly
suggest he is right – then 2017 may prove to be the year that the U.S. economy
finally takes off and leaves investors with no doubts as to its latent strength
and momentum.